Forex spread is the transaction cost of a trading for the forex trader and the commission or service charges for a broker. It is the difference between the Bid and Ask price of a trading commodity or a currency pair.
A currency pair comprises on two currencies i.e. base currency and counter or quoted currency. Base currency is valued in terms of other currency by using the exchange rate. The base currency at all times equal to one.
In the case of currency pair EUR/USD = 1.3651
The first currency i.e. EUR is the base currency and another currency i.e. USD is the counter currency. The quote read as one (1) EUR is equal to USD 1.3651 or in other words, € 1 is worth of $ 1.3651. A trader needs to spend $ 1.3651 for buying the € 1.
The bid and ask price are used in the forex trading from the viewpoint of the trading platform or the forex broker. It is the forex broker that is actually buying or selling the currency to a trader. In this context, if a trader wants to buy a currency pair, the trader will pay the asking price of the broker and in the case of selling, the trader will accept the brokers bidding price.
For Example EUR /USD = €1.3649/1.3651, bid price € 1.3649 and ask price € 1.3651. That means, a trader buying the EUR will pay the asking price to the broker i.e. €1.3651 and in the case of selling a trader will accept the bid price of the broker i.e. €1.3649. The bid price is always lower than the asking price.
Stop loss order is a type of order that is used to put a limit to a trading loss by setting an adverse price level. When the market price approached to the stop loss price level, trading platform or broker automatically close out the trading position by executing a sell order at the broker’s offered bid price i.e. €1.3649 (using the data from above example – in case of a BUY order). While in the case of opening a new long (buy) position, a trader will pay the asking price i.e. €1.3651. Vice versa for short orders.
In case of take-profit orders, trader set the profit price level when the market price reaches to this level and the trading platform close out the trading position for ASK price (in case of a BUY order).
Electronic Communication Network (ECN) brokers enable the traders to directly connect with other traders for the purpose of trading. ECN serves as a bridge that is provided by the forex broker (also called the ECN broker). The trading platforms get the liquidity from the liquidity providers for the trading customers and deliver orders for execution to the liquidity providers.
ECN spread is very tightening normally but a trader has to pay commission on a transaction basis.
Straight Through Processing (STP) in this trading process no intermediary desk involved and trading orders directly pass on to the liquidity providers. The trading commission of the broker is incorporated in the spread (by spread mark-up) and these are variable spreads that are dependable on the availability of buy or sell orders from the liquidity providers.
Forex spread is broadly categorized as fixed and variable spread.
Fixed spread as the name denoted is a fixed or constant spread and will not be changed with respect to the market fluctuations (a sign of market making forex broker) while the variable spread reflects the changes according to the market volatility and liquidity (market depth) conditions.
The selection of a potential broker is the key to success in the forex trading. How a broker price the spread is one of the important characteristics in selection. Spread for a trader is a cost of doing business and this cost significantly increase when the volume of trading transactions increases. The trader needs to make a regular check on the broker because some low-quality brokers used the tactics of widening or manipulating the spread especially when the customer trading goes against the broker profits. However, to overcome this problem, there is the forex spread indicator. Thanks to our spread indicator, you will be able to measure the real cost of spread and also create an analysis of spread fluctuation among different brokers.